Pay-Per-Click, or Sponsored Search, marketing is an interesting field because of the duality of skills necessary to be successful in it. On one hand, you have to understand the numbers – you have to know what a customer is worth to you, how many visitors to your site you can reasonably expect to become customers, how much you can afford to pay for a single visitor, etc. On the other hand, you have to be able to write convincing, compelling ad copy, and the destination web copy has to also be well-written. So to be successful in Pay-Per-Click, you have to be both a mathematician and an artist.
The Mathematician
The Mathematician really needs to understand the goals of the Pay-Per-Click campaign. You need to know how many customers you want to try to gain and how much you can afford to pay to acquire each new customer. If you don’t know what a new customer is worth, then that is something you really need to find out. Otherwise, you’re shooting in the dark.
As a professional PPC marketer, I have clients asking me to generate x sales per day or per month while spending y dollars. This is often a difficult situation because it often means I need to get clicks as cheaply as possible while maintaining a certain level of conversions. The thing that makes this a difficult situation is that as click bids go down, often conversion rates go down as well. One reason is that to generate low cost traffic, you have to use content networks as well as search results, which are much less targeted.
Nonetheless, to even tackle the problem I need to understand the numbers. Here is a very simple formula to calculate how much you can spend per click on your PPC campaign:
Cost Per Click = Amount You Can Afford to Pay Per Customer * Conversion Rate
OR
Cost Per Click = Average Sale * Profit Margin * Conversion Rate
For example, if you generate $50 revenue per customer, on average, with a 50% profit margin, then you can afford to pay up to $25 to acquire a new customer. You would only break even at that rate, but at least you would gain a new customer and would have the opportunity to sell more products or services to that customer in the future. Assuming a conversion rate of 1%, then the numbers work out like this:
Cost Per Click = $25.00 * .01 = $.25
OR
Cost Per Click = $50.00 * .50 * .01 = $.25
So you now know that you can afford to pay a quarter per click. If you can double your conversion rate (which falls on the Artist side), then you can double your profit or double your bids.
As you watch your PPC campaign, you might find that certain products sell much better on-line that others. If this is the case, then you might want to re-work your numbers to emphasize the products that are selling. For example, let’s say you have the following products, which are selling via PPC in the following proportions:
Product A – $25 profit per sale – 50%
Product B – $10 profit per sale – 10%
Product C – $40 profit per sale – 40%
Then your average profit per sale via PPC is as follows:
($25 * .50) + ($10 * .10) + ($40 * .40) = $12.50 + $1 + $16 = $29.50
Based on these numbers, you now know that you can raise your bid to about $.30.
As eluded to above, it may even be worth taking a loss on the first sale just to get the customer. If you know the lifetime value of your customers, then you can make this call. If you generally only do business with your customers a single time, then that is another area of your business you need to investigate – how to sell more to people who have already done business with you. This is where you should use vehicles like email, newsletters, blogs, etc. to create a community of customers who come to rely on you for information. It all comes down to creating a holistic, integrated marketing plan, and it all starts with knowing your numbers.
Tomorrow we will look at the other PPC discipline – the Artist.
If you would like some help managing your own effective, powerful Pay-Per-Click marketing campaign, contact Work Media at 888-299-4837 or info@workmedia.net.